EPAct 179D Experts

"The least expensive kilowatt, is the one not used."

- Jacob Goldman

Warehouses Use Tax for Energy Efficiency & Solar

Large warehouses are presented with tax-supported opportunities to power
their properties with solar P.V. while also profiting from selling excess
energy.

At the end of January 2011, the Wall Street Journal announced the agreement
to merge two of America’s largest warehouse owners, namely ProLogis and
AMB. This created the world’s largest warehouse owner with total
warehouse space exceeding 600 million square feet. This is a critical event for
U.S energy policy since rooftop solar P.V. prices have plunged and large
flat-roof warehouses are the best platforms for solar P.V. electricity
generation. Both ProLogis and AMB have a major presence in the European
warehouse market, including Germany and the Netherlands, where rooftop solar
P.V. has a much wider market penetration than it does in the U.S. Many
warehouse owners, particularly Wal-Mart supplies and other large consumer goods
suppliers, must upgrade to solar P.V. supported warehouses in order to maintain
preferred supplier status.1 Although solar P.V. is eligible for large tax
credit and depreciation benefits, ProLogis and AMB are both REITs (Real Estate
Investment Trusts), which typically do not have large tax appetites at the REIT
level. However, REITs can always utilize solar cash grants and in an expanding
economy, tax equity investors, including business-motivated electric utilities,
can utilize the large tax incentives related to warehouse P.V. installations.
Before upgrading to solar P.V. most warehouses need to make investments to
reduce energy costs and make roof improvements that are also eligible for
substantial tax incentives.

The EPAct Section 179D Tax Opportunities

EPAct 179D

Pursuant to Energy Policy Act (EPAct) Section 179D, warehouses making
qualifying energy-reducing investments in their new or existing locations can
obtain immediate tax deductions of up to $1.80 per square foot.

If the building project doesn’t qualify for the maximum EPAct $1.80
per square foot immediate tax deduction, there are tax deductions of up to
$0.60 per square foot for each of the three major building subsystems:
lighting, HVAC (heating, ventilating, and air conditioning), and the building
envelope. The building envelope is every item on the building’s exterior
perimeter that touches the outside world including roof, walls, insulation,
doors, windows and foundation.

Alternative Energy Tax Credits and Grants

There are multiple 30% or 10% tax credits available for a variety of
alternative energy measures with varying credit termination dates. For example,
the 30% solar tax credit expires January 1st 2017 and the 10% Combined Power
tax credit also expires January 1st 2017. The 30% closed loop and open loop
biomass credit expires January 1st, 2014.

All alternative measures that are eligible for the 30% and 10% tax credits
are also eligible for equivalent cash grants for the three years staring
January 1st 2009 and ending December 31st 2011.

Sq. Feet of Useable Roof Area1Assumed Wattage Generation

(at 10W/sq.ft.)

Installed Project Cost At $4.00/WattTotal Tax Credits at 30%

100 million1,000 MW$4 billion$1.2 billion

200 million2,000 MW$8 billion$2.4 billion

300 million3,000 MW$12 billion$3.6 billion

150%-70% of roof area is available for solar panel mounting.

Available Tax Credits for Large Scale Warehouse Solar P.V

A warehouse owner with 100 million square feet of useable roof area has the
capacity to generate about 1,000MW of electricity. A small to average sized
utility power plant generates about 100 MW, so large-scale warehouse owners
have the potential to turn their properties into large scale utility
providers.

Leading Example

One leading example of the warehouse-to-utility conversion is Heller
Industrial Parks, a national property owner with over 13 million square feet of
warehouses in New Jersey.

In its first solar initiative, the firm completed 1.5 megawatts of solar for
$7.5 million.

In its second initiative scheduled for completion in May of 2011, the
company intends to complete a 5-megawatt, $25 million project in New Jersey.
This translates to the power generation capacity of a small power plant.

The company also installed energy efficient lighting fixtures with day
lighting sensors at the dock level enabling the lighting to be dimmed or shut
off when there is sufficient natural daylight.

Heller-related press releases indicate that the company has used solar P.V.
as a competitive weapon to buck “the trend of vacant industrial complexes
throughout New Jersey”.2 Heller’s CEO Jeff Milanik stated “we
began this process several years ago with the goal of offering our customers in
New Jersey better more efficient space for their businesses. It is a very
competitive business that we are in, and we are focusing on ways to improve our
buildings”.

The AMB/ProLogis EPAct 179D Opportunity

Both of the large warehouse REITs have accomplished an ongoing warehouse
solar P.V. initiative. AMB has recently entered into a transaction with
Southern California Edison (SCE), the large utility, to lease some of its large
warehouse roofs. Aaron G. Brinkly, the Director of Sustainably program for AMB,
has stated that the direct investment by the utility works better for them
because the utility can fully utilize the tax benefits as compared to their
REIT structure. ABM owns 22 million square feet of warehouses in the Los
Angeles area alone.

ProLogis has also entered into a similar transaction with Southern
California Edison in Fontana, California. The utility has announced that they
expect to lease 100 to 125 more rooftop areas totaling 1.5 square miles of roof
space during the next five years. It should be noted that the five-year plan
correlates to the five remaining years of solar tax credits available from 2012
through 2016. The Fontana project covers almost 600,000 square feet and
produces 2 megawatts of electricity. When describing the Fontana project, Julie
Schmit of USA today, writes: ”The program in which the utility owns the
solar is the largest of the kind in the nation, not surprising since California
is the number 1 solar market. But utilities in other states, including North
Carolina, New Mexico, and Arizona have similar plans to rent roofs for their
own mini-solar plants to.” ProLogis is also installing energy efficient
lighting before the solar P.V. installation.

Seven New Solar Power Plants for Southern California Electric (SCE)

Seven new solar power projects are now online for Southern California
Electric (SCE). These plants are capable of providing energy for an average of
8,125 homes. The newest solar photovoltaic installations are located in Ontario
and Redlands, California. Collectively, they have a generating capacity of 12.5
million watts (AC). Constructions of these power plants are meant to speed up
California’s consumption of solar generation while diminishing the cost
of photovoltaic panels for everyone.

ProLogis leased 1.8 million square feet of warehouse roof space to the four
Ontario solar station installations. The 32,950 solar photovoltaic panels in
Ontario are capable of generating 5.5 million watts (AC) of power. The three
installations in Redlands were also spread over ProLogis warehouse roofs.
Redlands contained 34,600 solar panels spread over 1.5 million square feet of
ProLogis warehouse roofs. This will produce 7 million watts (AC) of power.

By offering long-term power purchase agreements to independent producers
willing to build neighborhood plants, SCE has expanded its solar photovoltaic
program. As of now, the utility has presented 29 contracts, which will produce
about 43 million watts (AC) of new solar photovoltaic power for SCE
customers.

Mayor Pete Aguilar of Redlands has stated that SCE’s solar project has
supported their goals of job creation and the building of a greener tomorrow by
adding to their energy resources power plants that are silent, emission-free,
and use a renewable fuel source.

Solar PV: EPAct 179D Tax Enhanced Warehouse Pre-Planning

Lighting & EPAct 179D

Building lighting comprises of a large portion of warehouse energy use. Most
warehouses that have not had a lighting upgrade to energy efficient lighting in
the last 7 or 8 years utilize prior generation metal halide or T-12 fluorescent
lighting. It is also important to realize that effective January 1, 2009 most
probe-start metal halide lighting may no longer be manufactured or imported
into the United States and effective July 1, 2010 most T-12 lighting may no
longer be manufactured or imported into the United States. This means that
warehouses that still have this lighting technology will soon be subject to
large price increases for replacement lamps and bulbs.

This prior generation T-12 and metal halide lighting is very energy
inefficient compared to today’s T-8 and T-5 lighting, and a lighting
retrofit can easily reduce lighting electricity costs by 40 to 60 percent. In
addition to large energy cost reductions from the base building lighting, most
warehouses undergoing lighting retrofits install sensors that completely shut
off the lighting in portions of the warehouse that are not in use. Previously,
many warehouse owners and lighting specifiers were reluctant to install sensors
because they reduced fluorescent lamp useful life. Today, improved technology
sensors are available with warrantees not to reduce lamp useful life.

Heating & EPAct 179D

New and improved commercial heating systems can provide energy cost savings
of eight percent or more over the ASHRAE 2001 building code standards. There
are multiple heater technologies suitable for the warehouse market, including
direct fired gas heaters, unit heaters, and infrared (radiant) heaters3. If
feasible, the warehouse heater should be mounted on an exterior wall to
optimize the roof top solar P.V. space.

An example illustrating the maximum utilization of the $1.20 EPAct tax
deduction for a 100,000 square foot warehouse with an energy efficient heater
is as follows:

With this example, the $120,000 (100,000 sq ft x $1.20) entire investment
EPAct tax deduction will be achieved as long as the combined lighting heater
project reduces total energy cost by 33 1/3 % as compared to ASHRAE 2001.

Building Envelope & 179D

If a warehouse requires re-roofing, the owner should strive to achieve the
maximum $1.80 per square foot EPAct tax deduction. Moreover, when re-roofing,
this is the ideal time to consider adding more insulation. If the building
already had an energy efficient design and roof, the owner may want to consider
upgrading to more energy efficient truck bay doors and windows.

With this example the maximum $180,000 EPAct tax deduction (100,000 sq ft x
$1.80) will be available as long as the combined lighting, heater and roof
project reduces total energy cost by at least 50% as compared to ASHRAE
2001.

As presented above, all major warehouse owners installed energy efficient
lighting before installing the solar P.V. Doing so enables them to reduce the
tenants’ operating costs and provide excess electricity above the
tenants’ need that can be sold back into the grid.

Conclusion

Moving forward, large warehouse owners are clearly going to convert a
tremendous number of warehouse roofs to solar P.V. electricity generators. The
larger REIT warehouse owners without tax capacity are best suited for utility
investor programs. The mid-size and smaller non-REIT warehouse owners have the
same energy cost savings and opportunities and should have the added advantage
of being able to retain and utilize all of the large tax opportunities.